27 November 2014

GP commercial mortgages: The cost of change

Are you or a colleague considering retirement or leaving the Practice? What affect will this have on the Practice’s borrowings?
There are a number of reasons why the Practice may require a change to the terms of a commercial mortgage or surgery loan, for example:

because of a retiring partner seeking release from the Practice’s commercial mortgage; or

the practice seeks to relocate to more modern premises.

However, as these mortgages were often entered into a number of years previously, problems can arise. In particular, if the mortgages and surgery loans were entered into on a fixed interest rate basis they are likely to contain an early repayment or exit fee, which can be substantial and potentially prohibitive from enabling the surgery to replace parties within the loan arrangement. As such, retiring partners are forced to remain liable to the lender despite no longer being active with the surgery and plans for development of the Practice are put on hold.

Given the way in which GP Practices are structured, it is of fundamental importance that your financing arrangements are fit for your specific purpose and allow you and your fellow partners the flexibility to join and leave your partnership without undue financial restriction.

It is essential that you have appropriate financial and legal arrangements in place that provide for your present and future requirements. Therefore, issues as to exiting partners must be dealt with from the outset, not only within the partnership agreement, but also in any loan arrangements with the bank.

We consider below the impact that exit fees are currently having on a Practice and a retiring partner.

Case study

In the 1990s, two GPs, who were partners by way of a partnership agreement, entered into a “Practice Finance for Doctors Loan” (a type of commercial mortgage) for a period of 34 years to assist with the construction of a new surgery.

The mortgage offer included a term in respect of early repayment charges. The term stipulated that the level of the repayment charge would be defined by reference to a combination of two different methods of calculation.

The first method was calculated by reference to a sum equal to 3 months’ interest, which is a fairly common provision in any mortgage. However, the second method of calculation was a highly complex matrix designed to compensate the lender for any net loss to them resulting from early repayment. This was based on the premise that the lender would suffer a loss if they were unable to reinvest the repayment monies in similar security.

The explanation which the lender provided to the partners was woefully inadequate and it failed to give any indication of the likely cash value of the early repayment charge. As a result, the partners had no or very little idea of the potential sum involved and were misleadingly left to assume that this would simply equate to a few months’ interest payments in accordance with a variable interest rate loan.

One of the partners subsequently retired and sought release from the mortgage and was informed that an early repayment fee in excess of £50,000 would be payable. In order to avoid incurring the fees, a new partner agreed to take over the retired partner’s share of the mortgage.

When, some 10 years later, the new partner decided to retire and sought to be released from the mortgage, the lender informed the partnership that the repayment fee was approximately £140,000. This equated to a staggering 60% of the total sum payable under the mortgage.

The situation which the partners now find themselves in is that unless they are able to find a new partner who is willing to step into the mortgage, the retired partner will effectively be locked into the mortgage, until the term expires. By this time, the retired partner will be over 70 years old. With the lender charging such excessive fees it is easy to understand why a new partner has chosen not to join as a borrower to the loan facility.
We are currently acting on behalf of the surgery to challenge the reasonableness of the exit fees, specifically the failure by the lender to clearly explain the basis for the fee.

What can you do?

If you or your fellow partners are considering changing the members of the partnership and it impacts on the loan facility, it is crucial that you check the early repayment terms of your mortgage as soon as possible. You are entitled to request details of any possible exit or other fees from your lender.

If you are faced with a potentially unreasonable charge then its worthwhile exploring further to understand how the potential charge and the facility was explained to you from the outset.

Ask yourself what advice, if any, was given to you when you entered into the product. Lenders and other financial providers have a duty to ensure that the product was sold in accordance to regulatory guidelines.

Also consider whether the lender informed you as to the implications if the surgery decided to change the terms of the loan facility.

The duties of the lender were enhanced on 31 October 2010. There is now greater regulatory protection afforded to customers. Such duties include a duty to act fairly and reasonably and to ensure a product is suitable. However, if you entered into a mortgage before this date you should still expect to have received clear and appropriate advice.

If you think you may have a potential claim what can you do?

Generally you have six years from usually the date of the loan facility to bring a court claim against your bank or mortgage provider.
Outside of 6 years, you may still be entitled to bring a claim but your options will be more limited.

Harrison Clark Rickerbys is a leading law firm that specialises in the financial services and banking litigation. We are at the forefront in assisting our clients to obtain compensation from their banks and mortgage providers. We have developed considerable expertise in pursuing claims and have recovered several millions of pounds on behalf of our clients.